A report from Citi analyst Walter Pritchard made headlines this morning with claims that HTC agreed to paying five bucks per every Android handset sold. The basis for this is Microsoft’s patent settlement with the Taiwanese handset maker over intellectual property infringement, the analyst has found out. The fact that HTC makes Windows Phones obviously didn’t help dodge that patent hit.

Microsoft’s boss Steve Ballmer argued last October that Android wasn’t free just because it’s open-sourced. Some watchers are calling the Android platform a patent bomb waiting to explode. HTC is also being sued by Apple over alleged breach of iPhone patents and Oracle is suing Google over use of Java in Android. Pritchard warns other Android vendors can expect to pay royalties to Microsoft between $7.50 to $12.50 per device, which is troubling and here’s why.

Obviously, high patent fees are eating into the already slim margins. How slim? A Citi analyst Kevin Chiang believes most Android handset makers enjoy operating margins between 10 and 15 percent. Microsoft’s $12.50 per-device patent fee could be especially damaging to the makers of inexpensive Android handsets with an average selling price (unsubsidized) of $200-$300, even $100 in some cases. Also worth pointing out, Android tablet makers are most endangered because most are barely surviving on operating margins of just two to three percent, per Chiang’s estimate.